Is the US Approaching the End of an Economic Growth Spurt?
As you know, we’ve been wondering about the exhaustion of the Industrial Revolution innovation…and the bankruptcy of the Social Welfare state as a result.
We take for granted that a healthy economy ‘grows.’ Our governments depend on it to pay the bills. Our investments depend on it too; we buy investments that we hope will become more valuable as sales and profits grow along with the economy. But what if all of our assumptions about what is ‘normal’ are wrong? What if the growth spurt we have known for the last 300 years was the exception, not the rule? And what if it were now coming to an end?
We traveled to Switzerland yesterday. What a great town Zurich is! Clean…prosperous…charming. And last night, it seemed like there were more people enjoying the warm May evening than there were townspeople. The sidewalk cafes, restaurants and bars were overflowing. Everyone was outside…strolling…chatting…drinking. The Swiss must have it made.
“Well, yes, it’s a great place to live. But not if you live on a salary,” a banker explained. “There are so many Germans moving here – because it’s a beautiful city…and because people leave you alone here – prices have gone up. An ordinary citizen can hardly afford to live in Zurich anymore. And when I walk down the Bahnhofstrasse I rarely hear our local language spoken. I hear High German, or Russian, or Turkish, or English.”
We can confirm that prices are high. Not by DSK standards, but high for us. Our hotel near the train station was not particularly fancy. But our modest room still cost about $700 a night.
Our friend Rolf Dobelli of getAbstract interviewed us. He challenged our ‘end of progress’ theory.
“It’s hardly a theory,” we covered our tracks. “It’s just an idea. We don’t know if we believe it. Or like it. We’re just trying it on to see how it fits.”
“Yes, but people take ideas seriously. They might have come to the same conclusion in 1979,” he said. “They might have thought that the boom years were over then. But as it turned out, there were still huge growth dividends to be paid – principally from electronic communications and the efficiency gains they bring.”
“Maybe,” we replied. “But most of the above-trend, real growth since 1979 has been in the energy economies, that are still increasing their energy use per person. The mature economies have realized incremental improvements since then, but much of that was phony – driven by increases in debt and government spending. And it’s not clear that advances in communications bring real wealth improvements. Think of the television. It’s been around for more than half a century. It has probably actually depressed wealth since then. Now, with all those emails to answer…and Facebook and Twitter to keep up with…it could be that they are more of a nuisance than a wealth-producer.
“It’s like anything else. You get the big gains in the beginning. You invent a bow and arrow, for example. You hunt more effectively. Then, you can improve it. But there are only so many improvements you can make. After the bow and arrow, humans waited a long time – with little or no progress – until the firearm was invented. And note that guns, like every other major forward move in human history, were effectively a way of using more energy. You sent a projectile further, faster by drawing on condensed energy sources. Broadly, energy is wealth. The more you use, the richer you are.”
“But what about conservation measures…efficiency gains? Most European nations have stabilized or even reduced their use of energy in recent years.”
“That’s my point. You get big productivity and wealth gains from the first increments of oil-based energy. Then, you eventually reach a point of diminishing returns, where gains are few. You become more efficient. You become better at using it. But your ‘growth’ levels off too.
“We’re seeing a reflection of this in population figures. Fertility rates are high in the emerging economies – where energy use is increasing rapidly. They are low in countries where energy use is topping out. In Germany and Japan – probably among the world’s most efficient energy users – there has been zero population growth for the last 10 years. And now, the population in Japan is actually falling. The Japanese economy is collapsing too. It’s gone nowhere for 20 years, and now – in the first quarter of this year – it’s shrinking at a 3.7% rate.
“As countries use more energy their birth rates decline. I’m not sure there is a cause and effect link, but that’s what happens. It is as if people knew, subconsciously, that they are reaching the limits of their new, oil-fired habitat. The latest population estimates show world population still rising…but at a slower and slower rate…until growth comes to an end in about 2050 with about 9 million people on the planet. Most likely, that is about when gains from additional energy inputs level off too.”
Meanwhile, the news yesterday brought nothing special. US stocks rose a bit. Oil remained below $100 – still three times what it was 5 years ago. Gold fell to $1,492.
The Fed pumps in more and more money. Stocks float. But key parts of the US economy are made of lead. Housing and unemployment, mainly. The New York Times tells us today that debt-burdened college graduates are having a much harder time finding suitable work. And when they do find a job, the starting salary will be an average of 10% lower than it was 5 years ago – not including inflation.
Even when new jobs are created, they’re rarely the ‘middle class’ jobs that can support the housing market. So more than 1 out of every 4 homeowners is underwater…with more sinking every day.
Curiously, many of these drowning homeowners are actually helping to support the consumer economy. More than 4 million of them aren’t making regular mortgage payments. The typical foreclosed mortgage hasn’t been serviced in more than 17 months. That leaves millions of people in houses they aren’t paying for…giving them more money to spend.